Wall Street West—Westside Junk Bond Shop Eyes Big Deals in Merger

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Larry Post, founder of the Post Advisory Group, the Westside junk bond shop, confirmed last week that his firm is merging with Metropolitan West Financial LP, a big local money management outfit.

Post, who manages $500 million in junk bonds, said the merger will help him step up from running money for individuals and smaller foundations, to handling institutional dough.

“When you get $500 million under management, it’s hard to really grow just by getting another (individual) account,” he said. “You need some bigger chunks of money.”

Post himself is a quiet sort, and never advertised.

“We never even went after institutions, and never had a marketing department,” he said. “By merging, we get that. And I can still spend full-time on managing the money.”

West Los Angeles-based Metropolitan West Financial is another one of those quirky, under-the-radar financial shops and yet it nonchalantly answers to managing almost $45 billion.

The lion’s share of money that Met West manages, $30 billion, is in an arcane alley off Wall Street known as “securities lending.” Many large institutional owners of stock plan to own their shares for a long time, and even in perpetuity, if you consider huge pension funds, such as Calpers (the state employee pension fund) or index funds, which continually hold stock in the S & P; 500. Essentially, they buy and never sell. Met West acts as an intermediary, garnering shares from institutions, and then lending with interest charges to brokerages, which re-lend to short traders. Met West passes most of the interest collected through to the institutional shareholders, and keeps some.

But Met West also manages a portfolio of $12 billion in investment-grade bonds, and another portfolio of $1.7 billion in equities, according to Patrick Mitchell, managing director.

By the way, Post thinks the junk bond market is potentially at its most interesting juncture in 10 years. Yields on junk have soared to more than 800 basis points (8 percent) above similar-maturity government bonds, a level last reached in the Persian Gulf War days. A confluence of events including the fallout from the Asian and Russian flus of two years ago, some crumpling hedge funds (which liquidated junk portfolios), some bad underwritings (which bombed), and some outflows from junk mutual funds have combined to push junk bonds down, and push yields up, to record highs, said Post.

Taking Stock

Ken Luskin, who could be called “the fighting investor” for his aggressive style of money management, has struck again. Last week he filed a 13-d on El Segundo-based Peerless Systems Corp., the software designer and manufacturer. He now owns 8.3 percent of the stock and may buy more, and by filing the papers with the SEC, Luskin has signaled an intent to talk to other shareholders, directors and management about getting the stocks price up.

The stock could use a boost. It traded last week at $1 a share, way off its all-time high of nearly $25 a share in June 1998.

Luskin, founder of Intrinsic Value Asset Management in Malibu, says that Peerless has $2.50 a share in the bank, and hot new software for something called “network attached storage.” The software allows users of networked computers to store and retrieve data more easily. In the past, Peerless’ main gig has been software for makers of digital imaging machines, such as faxes and copiers.

The company has been losing money; it reported a net loss of $2.0 million (14 cents a share) in the fiscal third quarter ended Oct. 31, compared with a net loss of $2.3 million (15 cents a share) in the year-earlier period. Revenues were $9.5 million vs. $11.7 million.

Luskin thinks black ink lies ahead, based on the new networking software.

Baxter Role Change

Frank Baxter, 63, chairman and CEO of brokerage Jefferies Group Inc. since 1987, last week clarified what his role will be after he relinquishes his chief executive title at the start of next year to junk bond chief Richard Handler, who works out of the brokerages’ Stamford, Conn. offices.

“I will still be working full time at Jefferies,” Baxter said. “I will be spending more time on business development and being an ambassador for the firm.”

Jefferies, having escaped ownership by a bank or insurance company in the last five years, is now a most rare bird on Wall Street a small, independent national brokerage. Robertson Stephens, Hambrecht & Quist, Montgomery Securities, and many others have been bought.

So where does Baxter see lone wolf Jefferies as hunting?

“All of the consolidation has made available some talent to us that would not be there otherwise,” said Baxter, speaking of troops who bolt for the doors after every merger. “And more niches are open than before.”

In particular, small and mid-cap companies are less served than ever by the bulge-bracket firms. The huge national brokerages really don’t want to work with small or even many mid-cap companies anymore. Like some other investment bankers, Baxter now likes to get involved in earlier stages of a company’s development, when it needs private growth capital, and then see it to an IPO, and if all goes well, help with follow-on or bond offerings or M & A; work after the company becomes mature.

To help companies get their dough, Jefferies has 39 years of contacts and experience with institutional buyers of equities and bonds, notes Baxter. So with the chief executive of Jefferies now in the New York orbit, will Jefferies go the way of Cantor Fitzgerald, the Beverly Hills bond house that slowly migrated to New York after founder Bernie Cantor passed away?

“Well, we have always been something of a virtual firm,” said Baxter, who owns about $90 million of Jefferies stock, at last week’s prices. “But we have a strong corporate finance presence here, and I think the headquarters will remain here.”

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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